Steven Y. Wu

Risk Versus Reward, a Financial Analysis of Alternative Contract Specifications for the Miscanthus Lignocellulosic Supply Chain

We evaluate how different contract designs impact risk sharing along the supply chain for the dedicated energy crop miscanthus. We model the full production and transportation system of the miscanthus supply chain because a sustainable supply chain must procure biomass in a cost-effective manner. Using this model, we estimate the financial returns and risks for both a farmer producing miscanthus and the biofuels plant purchasing miscanthus. We evaluate differences among contracts that are designed to address the miscanthus investment cost and the farmers’ opportunity costs. We find that risk can be reduced to both the farmer and the plant by offering a dollar per acre base payment combined with a dollar per ton payment. The farmer faces the lowest risk when the contract combines a dollar per acre and dollar per ton payment. Lastly, we find that indexed contracts designed to reduce annual counter-party risk associated with the risk of farmers opting out of the contract to produce competing crops actually increases overall financial risk to the farmer and plant.

Testing Canonical Tournament Theory: On the Impact of Risk, Social Preferences and Utility Structure

We use experiments to test comparative statics predictions of canonical tournament theory. Both the roles of principal and agent are populated by human subjects, allowing us to test predictions for both incentive responses and optimal tournament design. Consistent with theory, we observed an incentive effect from raising the winners prize. However, we also observed several empirical puzzles that appeared to contradict theory. Controlling for social preferences did not resolve the puzzles, although social preferences do influence behavior. It turns out that the puzzles can be explained by the canonical model once the textbook assumption of separable agent utility is relaxed.

Producer Protection Legislation and Termination Damages in the Presence of Contracting Frictions

This study models producer protection legislation that would grant growers the right to claim damages (PPLD) if their contracts are prematurely terminated. In the absence of contracting frictions that prevent contractors from redesigning contracts to accommodate exogenous policy changes, PPLD would not be distortionary or redistributive. If contracting frictions exist, then PPLD would have efficiency and redistributive effects, though the direction and magnitude depends on the size of PPL damages vis-a-vis expected damages under existing contract law. This study clarifies the conditions under which PPLD would decrease efficiency and protect growers.